Cambodia is booming, and its flourishing economy is being fueled by investment from Chinese state-owned and private companies.

When planeloads of Chinese tourists land in Siem Reap to visit the world famous Angkor Wat temple complex, they could be forgiven for thinking they’re still in China despite having had their passports stamped. The motorized rickshaws known as tuk-tuks they take might have been donated by the government of Hubei province, the de rigueur Smile of Angkor Wat dance performance might have been operated by the Yunnan Media Industrial Investment Holding Group and, of course, there are the Chinese hawkers in the night markets.

Besides, the Chinese yuan is the second most commonly used foreign currency in the country after the US dollar, circulating widely among local guides and convenience stores.

About 333,900 Chinese tourists visited Cambodia in 2012, up 35 percent year-on-year and predicted to reach 1 million in 2020, according to Cambodia’s Ministry of Tourism. But much more important, and crucial for both sides, is the extent of Chinese investment in Cambodia.

The Council for the Development of Cambodia (CDC) says Chinese investments reached $263.6 million in 2012, about 11.6 percent of total Foreign Direct Investment (FDI). China was the second biggest investor, slightly behind South Korea.

Although the late king Norodom Sihanouk called for practicing “Buddhist socialism”, Cambodia has embraced the free market spirit. With no capital control, low labor costs and a nine-year tax exemption policy, the Southeast Asian nation has become a hot investment destination.

The latest Global Investment Trends Monitor released by the United Nations Conference on Trade and Development shows that FDI inflows to Cambodia rose by 104.3 percent year-on-year in 2012, an outstanding performance in the region which had an average 7.3 negative growth.

Total FDI in Cambodia doubled from 2011 to 2012. However, its size is still the second smallest in Southeast Asia, behind the Philippines. According to CDC data, Cambodia registered $2.28 billion in FDI last year. South Korea, China and Japan were the largest investors, together representing about 33 percent of FDI.

“This year is the best time for Chinese companies to invest in Cambodia, because 2013 is Sino-Cambodia friendship year, with many favorable policies,” says Cao Yunde, president of Khmer First Investment Holding Group, a Phnom Penh-based conglomerate of mining, publishing and finance companies, backed by the State-owned China Overseas Oil and Mineral Resources Investment Ltd.

“Chinese investors who manufacture in Cambodia can import their goods to the other nine ASEAN countries without tariffs, as well as to Japan, South Korea, India and other countries that have signed free trade zone agreements with ASEAN,” Cao tells China Daily Asia Weekly.

“Cambodia is the only country in Southeast Asia that allows wholly foreign-owned enterprise, which I believe is the most attractive part to Chinese investors.”

In recognition of his contribution in bringing in investments, the Cambodian government in 2011 conferred on Cao the honorary title of “Oknia” with a minister level rank. He also became a senior advisor to Chea Sim, chairman of the ruling Cambodian People’s Party and president of the Cambodian Senate.

Cao’s company owns major mineral extraction rights in Cambodia, including for copper, gold, iron ore and coal.

“The costs of developing a gold mine could be as low as 1 percent of a similar kind in China, if you consider the costs of labor, mineral rights and related infrastructure construction,” he says.

According to the CDC, Chinese investors are focusing on agriculture, mining, infrastructure construction as well as garment manufacturing, while South Korean investors are engaged more in toy-making, electronic parts manufacture and financial services.

Chinese investments have reached nearly every sector through business operations or aid projects.

Earlier this year, the China Railway Construction Corporation agreed to invest $11.2 billion in Cambodia over the next four years to build a 400 km railway, a steel plant and a seaport. It is the biggest investment in Cambodia to date.

Cambodia: Land of Opportunity

The Shanghai-based China Perfect Machinery Industry Corp signed a $2.3 billion contract with the Cambodian Petrochemical Company last year to build the country’s first oil refining plant. It is expected to be completed in 2014.

One of China’s biggest farming companies, Guangdong Agribusiness Group, invested $425 million last year in planting rubber in Cambodia’s Kratie and Mondulkiri provinces.

“Building mutual markets with those countries and using advantages is the better way to develop and avoid trade conflicts,” he says, adding that overseas plantation has helped the group’s annual rubber output to jump from 50,000 tons to 350,000 tons.

During a meeting with Prime Minister Hun Sen, who visited China in April, Premier Li Keqiang said that China encourages its enterprises to invest in Cambodia and import its competitive agricultural products.

The two sides signed a number of deals, including agreements on economic and technical cooperation, Chinese loans to Cambodia for developing bridges and irrigation systems, grant aid for a vocational school on agriculture and a memorandum of understanding on an oil refinery project.

As historically friendly partners, they also signed an action plan on implementing the Comprehensive Strategic Partnership of Cooperation between the two countries.

“More investment in Southeast Asian countries is the trend for Chinese companies because of lower costs, although it is not as much as in western markets right now,” says Hu Yifan, head of research and chief economist of Haitong International, one of China’s leading financial service providers.

“Chinese investments are mostly focused on resource-oriented industries in those countries, such as mining, agriculture and infrastructure,” she says.

A recent survey by consultancy firm Towers Watson shows Cambodia to be the preferred investment destination over Laos and Myanmar. However, the survey also shows recruitment of key talent, competitive salaries and the prospect of rising attrition rates are tough challenges for the emerging economy.

“The majority of the foreign talent is from the countries that have made the investments in Indochina — for example, Japan and Singapore … many are from Thailand and Vietnam which enjoy a close cultural affinity,” says Rachelle Arcebal, Towers Watson’s practice director of global data services in Asia Pacific.

Cambodia’s unskilled workers, though cheap, have become a hidden cost for foreign investors, according to Kenneth M. Atkinson, managing partner of Grant Thornton (Cambodia), the local branch of the global accounting firm.

Khmer First Holding’s Cao says hiring a skilled Cambodian crane driver in the mining field costs $300 a month, while it could cost 10,000 yuan ($1,630) to hire a Chinese driver.

“Low-level manufacturing is popular in Cambodia because of the low skill level needed in this type of work,” says Atkinson.

“There remains very little higher-value manufacturing. For more specialized areas, companies find it very difficult to find competent personnel. Therefore either a long-term training plan is required, or foreign personnel or contractors are brought in,” he says, adding that one of his Chinese clients has estimated the workers in its Chinese factory to be 40 percent more efficient.

These observations show that Cambodia’s investment environment is not all rosy. Many problems have been identified such as serious power shortages, weak infrastructures and unclear areas in the law.

“Without certainty on correct procedures, businesses can feel they are carrying risk in these areas,” says Atkinson.

Rising FDI has helped Cambodia achieve a steady 7 percent GDP growth during the past few years. However, the country’s foreign debt has reached 29 percent of its GDP, and eventually reach 40 percent of its annual budget.

Keat Chhon, the economy and finance minister, has called for greater tax collection work since last year.

Cambodia has been proactive in welcoming foreign investors, by guaranteeing a nine-year tax exemption for Qualified Investment Projects with a minimum $250,000 investment in the 22 special economic zones.

“Cambodia is one of the most favorable business environments in Asia for foreign investors. It is as close to an open economy as Asia offers,” says Douglas Clayton, CEO of Leopard Capital, the parent company of the biggest private equity investment in Cambodia, the Leopard Cambodia fund.

The Leopard Cambodia fund has raised $34 million of committed capital since its launch in 2008. Clayton says most of the investments have performed well. The fund sees good opportunities in rural financial services, food and beverage production, and cash crops.

According to the latest Asia Business Outlook Survey carried out by the Economist Corporate Network in December 2012, only 1.2 percent of its 207 respondents in Asia were investing heavily in Cambodia, 15.3 percent were investing moderately, the others either having no interest so far or are at the early stage of investment, watching and assessing.

“We entered Cambodia because it was completely overlooked by investors and clearly had bright prospects,” says Clayton. “I think FDI will accelerate once more foreign investors come to understand this.”

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About Leopard Capital

Leopard Capital was founded in 2007 by Douglas Clayton to manage private equity funds in frontier markets. In Leopard launched Cambodia’s first fund in the depths of the 2008 global financial crisis, and in 2012 created Haiti’s first fund after Haiti’s capital region had been devastated by an earthquake. Leopard’s on-site investment teams work closely with portfolio companies to build market leaders in basic sectors such as renewable energy, food processing, water, telecoms, and financial services.

Leopard Capital LP is domiciled in the Cayman Islands and has offices in Cambodia, and Haiti.